Using the index model,the alpha of a stock is 3.0%,the beta if 1.1 and the market return is 10%.What is the residual given an actual return of 15%?
A) 0.0%
B) 1.0%
C) 2.0%
D) 3.0%

Question

Quizplus · Accepted Answer

Using the index model, the expected return of the stock would be:
Expected Return = Alpha + Beta*(Market Return)
Expected Return = 3.0% + 1.1*(10%) = 14.0%
The residual (R) is the difference between the actual return and the expected return:
R = Actual Return - Expected Return
R = 15.0% - 14.0% = 1.0%
Therefore, the answer is B) 1.0%.

Using the Index Model,the Alpha of a Stock Is 3